Recent Buy

buySome things never change. The Dow Jones Industrial Average is flirting with 14,000 points, and with my work being so crazy and unpredictable now would be a good time to take a break from buying stocks. I’ve talked about my plan of increasing my cash position over the first few months to counteract any potential surprises at work and so due to that my buying may be a little lighter through the first few months. Well, with the recent sale of AbbVie, Inc. (ABBV) and Abbott Laboratories (ABT) I find myself with more cash than usual and so Dividend Mantra is back to doing what he does best: buying high quality dividend growth stocks at attractive long-term prices.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 30 shares of Johnson & Johnson (JNJ) on 1/30/13 for $74.13 per share. I consider JNJ one of my core holdings, and one I feel very secure owning for the long-term. I haven’t purchased shares in JNJ since early 2011, so it’s been quite a while since I added to this position. JNJ needs no introduction, operating as a $200 billion health care giant. This extremely diverse healthcare company stands as one of the true leaders in the sectors and I’ve been a very happy shareholder for almost three years.

I purchased additional shares in JNJ for a number of reasons. First, when the market is as heated as it is now and equities seem to go up on a daily basis I like to focus on large cap, blue chip high quality stocks. When the market is down and value is everywhere that’s the time I feel appropriate to take on a little risk with some smaller cap plays as the market has a good chance to rise. With the DJIA being near all-time highs, a pullback could be imminent and as such I feel safe with some defensive plays like JNJ. Second, as I recently sold off a couple of major healthcare holdings in ABT and ABBV, I wanted to divert some of that new capital back into the healthcare sector to retain my exposure here. Third, the valuation here is pretty fair. I think JNJ is trading at a moderate price, and pretty close to its fair value. I think JNJ is worth paying fair value for, especially in a market littered with expensive stocks. A fair value, exposure to the healthcare sector and being about as high quality as it gets makes this an easy purchase for me. 50 consecutive years of raising the dividend definitely doesn’t hurt either!

Getting back to the valuation, I calculated a fair value of just under $76 using a Dividend Discount Model with a 10% discount rate, a 10% long-term dividend growth rate (just under its 10-year DGR) and a 5% terminal growth rate. Again, JNJ isn’t a steal at these prices. It’s a very high quality stock trading for a fair price.

This purchase came with an entry yield of 3.30%. Pretty solid for a blue chip stock. In addition, JNJ usually raises the dividend in time for the June payout, so I expect a rise in my yield on cost fairly quickly. Bonus! Looking at other fundamentals, the balance sheet is stellar, P/B is 3.2 and the P/E stands just under 20 at the moment. With this transaction I added $73.20 to my annual dividend income total. Awesome! The other great thing is that with these additional shares I now have a full 100 shares of JNJ. This adds JNJ to the exclusive 100+ share club in my portfolio currently shared with PM, VOD, INTC and KMI. The portfolio is growing nicely.

Qualitatively, I love JNJ. It has a strong consumer segment driven by brand names like Band-Aid, Tylenol and Johnson’s Baby Care. JNJ also has a very strong pharmaceutical business. Its medical device and diagnostics segment is robust. These segments are all very strong and will likely drive earnings growth for the long-term. It looks like the worst as far as quality control issues (recalls) is behind the company and the $20 billion Synthes acquisition offers tremendous opportunity for the future growth in the devices segment.

Overall, I still have more capital to put to work. I didn’t really plan to make a purchase in January due to a number of factors discussed above, but the recent sale of ABT and ABBV provided a lot of cash that I feel comfortable putting to work – even in this market. Due to the sale, however, I still haven’t fully made up for the loss of income from ABT and ABBV. This purchase makes up some ground, but I still have a little ways to go. I’m going to have fun scanning the market for further opportunities.

With this purchase I have 28 positions in my portfolio. That’s a net decline from last month due to the aforementioned recent sale.

Some current analyst opinions on my recent purchase:

*Morningstar rates JNJ as a 3/5 star valuation with a FV estimate of $77.00.
*S&P rates JNJ as a 4/5 star Buy with a FV calculation of $74.40.

I’ll update my Freedom Fund in early January to reflect my recent addition.

Full Disclosure: Long JNJ, PM, VOD, INTC, KMI

What are you buying?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Comments

    • says

      Journey,

      Thanks for stopping by.

      I think the diversification of the segments, and the products within each segment gives JNJ some insular protection against some of the things you mention. Of course, all companies have risk and that’s where the expectation of a return comes from. JNJ has risk to be sure, but in my opinion has less than a lot of other companies, especially in the healthcare sector.

      Best wishes!

  1. says

    DM– Nice buy. I don’t think you can go wrong with stocks in the healthcare sector; well you could but you know what I mean. I’ve been doing a lot of research lately in this sector due to fact that Obamacare is here to stay and the number of individuals entering the 65 and older age group is going to continue to grow for a long time to come. Getting exposure now to quality stocks like JNJ is not a bad move at all. Nice work.

    • says

      The Stoic,

      Great points there. The demographic changes currently underway in the U.S. could cause dramatic shifts in the healthcare landscape. I certainly like the idea of having a healthy exposure to diversified healthcare companies due to this. JNJ isn’t the cheapest stock around, but few are such high quality.

      Hope all is well!

      Take care.

  2. Chad says

    I like your purchase of JNJ. A good value when there are very good values out right now. Love to get it under $70, but it’s at a fair price. Can’t wait to see your next purchase.

    • says

      Chad,

      Thanks. I’d love to get JNJ under $70 as well. I think it’s fairly priced here, but a pretty solid drop from here would provide a great entry point with a small margin of safety.

      Best regards.

    • says

      Aspenhawk,

      Thanks for stopping by. Hope things are well on your side of the pond.

      To be sure, JNJ is not cheap here. It’s rather a fairly priced, high quality stock paying out a pretty strong entry yield. I really like increasing my position in high quality stocks when there are few undervalued stocks to be purchased. This provides my portfolio a defensive nature in the face of a possible correction. We’ll see how it all plays out!

      Best wishes.

  3. says

    Good purchase. I have been thinking about buying more JNJ, but I would prefer to get it for under $70 per share, which is around the 3.5% yield mark. More generally, it’s been a long time (over a year) since I’ve purchased a stock in the healthcare sector, so I’ve been looking closely at possibilities in that area.

    • says

      DGM,

      I’m with you. Purchasing JNJ under $70 would be a pretty solid price for a long-term holding. I’m interested in it at under $75 currently, but with 100 shares I’m pretty well fully invested now.

      I’m currently scanning for other opportunities. I’m staying fairly patient and prudent, waiting for opportunities to come my way.

      Take care!

  4. says

    Nice buy. I don’t think there are many “forever” stocks but JNJ would probably qualify for one. 50 years of dividend increases certainly helps you sleep well at night.

    I actually added a small amount of JNJ on Tuesday with my regular sharebuilder purchases. I hadn’t added to the stock since January of 2012. I figure with the market this elevated, I want to build up some of my core stocks so they are more in line with the weight of the rest of my portfolio. JNJ, PEP and MO are high on my list to add to. I’d love to get them cheaper but I’ll just buy a little at a time.

    • says

      AAI,

      JNJ is one of those few “forever” stocks for me as well. I, of course, always buy and monitor…but I feel fairly confident that JNJ will treat me well as a loyal shareholders for decades to come. Of course I felt the same about ABT…so companies and our attitudes towards them change.

      Nice to see I’m not alone in the JNJ buy. I’m with you on adding to high quality core holdings right now with the hot market. Defensive, low beta names should hold up well in the face of a correction, and while we continue to collect dividends it gives us a great opportunity (and additional capital) to buy even more. What more could you ask for?

      Best regards.

    • says

      Anonymous,

      Well I actually lost dividend income with the sale of ABT and ABBV, which I discussed in my last article. I regained some of that lost income with this purchase, but I’ll continue to use the capital from the sales to buy more high quality holdings. In the end I’m confident my annual income will actually go up as the combined yield on ABT and ABBV was right about 3%.

      Best regards.

    • Anonymous says

      I should have been more clear in my comment. I meant that with the ABT ABBV combined dividend of ~3% exchanged for JNJ at 3.30% there would be a net increase if the dollar amounts where equal. I imagine you will be able to allocate any remaining uninvested capital above 3%. Keep up the great work DM.

    • says

      Dividend farmer,

      I noticed the big drop in COP today due to a large fall in 4Q profit. I’m comfortable with my COP position size currently, so I would have to see a further drop before adding. The 3-year plan regarding asset sales and concentrating on traditional U.S. fields is still in its infant stages, so that’s also something I’m watching.

      Best wishes!

    • says

      Mark,

      Thanks for stopping by. Hope you’re staying warm up there!

      I know you’re a fan of JNJ as well. Glad to have you as a fellow shareholder!

      ABBV could turn out to be a fantastic stock. It’s still early to tell. I’m just not traditionally a fan of pure play pharma companies like ABBV, GSK, PFE and the like. They typically have that nice yield, but the need for constant innovation through the pipeline is worrying almost in the same way big tech companies worry me.

      Best regards!

  5. says

    DM,

    Good luck with JNJ. I have some reservations about how well it can sustain meaningful dividend increases , but its been successfully doing so for many years. Its financials in the last 5 years in terms of revenue growth and dividend payout make me a little cautious.
    I’ve recently added NVS, QSII, CME, BP and WU in January. Its been a big month for the Integrator Fund in terms of purchases!

    • says

      Integrator,

      Thanks for coming by.

      I think some of the recent bumpiness in EPS can be explained by the acquisition of Synthes and the recent quality control (recall) issues. I expect EPS to normalize and continue growing for the foreseeable future.

      NVS is one that intrigues me. It’s another heavily diversified healthcare company, like JNJ. However, NVS relies fairly heavily on the branded pharmaceuticals. Seeing as how they’re not really a pure pharma play and the yield is pretty strong it’s one that is in my wheelhouse. The annual dividend is a little undesirable as is the high foreign tax withholding, but all in all looks to be a solid holding.

      BP could be a nice value play depending on how all the litigation shakes out. I haven’t followed BP in a little while now. The yield is compelling and they’re certainly committed to shareholder returns.

      Best wishes!

  6. Anonymous says

    How very strange. I, also, bought JNJ today. I had a little bit of money come my way, and decided to add to my JNJ holdings, since I hadnt bought any since 2011 (too!).

    • says

      Anonymous,

      Wow! Nice to have a fellow investor buying JNJ here. I plan on holding JNJ forever, so buying at $74 or $73 or $75 doesn’t really matter all that much to me in the long-term.

      I hope it works out well for the both of us!

      Take care.

  7. says

    I have JNJ on my wish list, but it never seems to drop to the price I set it at! Methinks that the market will pullback sometime in the next month or two, so hopefully I’ll pick up some then. I’ve continued to hold onto my very small position of ABT/ABBV…I’m curious how it will do.

    How are you feeling about defense stocks these days? are you adding/avoiding? I’ve held off for forever in purchasing any, but I think that the time could be ripe to buy as sequestration seems to loom ever closer. Perhaps I’ll scoop up some small starter positions soon…

    • says

      kolpin,

      Thanks for coming by.

      Defense stocks in general are becoming appealing here due to the drops they’ve suffered as an aggregate. The sequestration fears are definitely creating some volatility here and it’s one of the few opportunities I see on the horizon right now. RTN, GD and HRS are all starting to drop down to my wheelhouse. I’ll continue to monitor these.

      Anything on your radar?

      Best wishes!

    • says

      Yes, I’m definitely interested in RTN, LMT, HRS. I’d like to nibble before the ex-dividend dates at the end of the month/early next month–so I’m not in a hurry to buy. Things may get more volatile for them in advance of the 3/1 deadline, and I wouldn’t be surprised if they still fall another 5-10%. UTX would have to dip quite a bit for it to get to my buy price.

      I used to own JNJ back in 2009, but sold it early last year in frustration as the stock price hadn’t appreciated since I bought it. Now that i’m focusing a bit more on dividends than capital appreciation, I would like to get back in eventually–closer to 67/68.

  8. says

    I don’t think you can go wrong with JNJ. I’ve got a fair value right around the current price and you don’t get a whole lot of opportunities to get in for cheaper. If we get a pullback in February JNJ might get added to my portfolio.

    Nice buy!

    • says

      Pursuit,

      Yeah, JNJ is one of those few stocks worth paying fair price for. At least in my opinion. KO would be another good example.

      I’m hoping we get that pullback in February. The market is due for a breather as some people decide to book profits. We’ll see how it goes.

      Take care!

  9. says

    Interesting read. I am getting ready to make a purchase here soon and was trying to figure out what I wanted to buy. JNJ looks interesting. I don’t currently have a position and this could be a good solid long term blue chip worth adding for diversification purposes.

    • says

      Dan Mac,

      I wouldn’t hesitate buying JNJ at current levels. I think it represents good value as long as you plan on holding for a long period of time. Short-term volatility is always a risk.

      There’s not much opportunity in the market currently (sigh). BDX was another healthcare stock I wanted to own but it shot up rather quickly and out of my price range. It happens quick!

      Hope you find some value out there. :)

      Best wishes.

  10. says

    I agree JNJ is fairly valued here. It wasn’t too long ago that the yield on JNJ was almost 4%, and I totally loaded up. I’ve been gradually reducing my position as it rose, but I intend to keep a core position even if it rises a lot more from here.

    • says

      S.B.,

      Thanks for stopping by! You have a portfolio I could only dream of owning.

      I agree JNJ has been at more attractive prices in the recent past. I purchased all my other shares at much more attractive prices at just under or just over $60. But I plan on holding for as long as JNJ continues to operate as it has in the past. Hopefully that’s many decades and I’ll be a happy shareholder.

      I don’t think I’d buy it much higher than where it’s at now, but I’m okay with current prices.

      Best wishes!

  11. Anonymous says

    Hey man keep the blogs coming. Your doing a great job. Have you thought about adding more Intel since it’s been beaten up lately? I was getting sick of seeing the stocks I’m watching at 52 week highs so added more Intel.
    -Jerry

    • says

      Jerry,

      Thanks for the kind comment. I appreciate it. I appreciate your readership and I’m glad you enjoy some of my posts.

      Intel is definitely attractively priced here, especially if you strongly believe in the story going forward regarding to its potential mobile business expansion.

      I’m not buying any right now, however, due to the fact that I’m already fully allocated to that position. Even it came down 10-20% I would probably not add any more. I’d really only like about 5% or so of my portfolio allocated to tech long-term, and INTC is sitting right about there right now. So, that leaves no room for any other tech holdings. I have to wait for the rest of my portfolio to expand a bit to allow some room for more tech.

      Best wishes!

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